I'm 67 and want to divert my wages into a tax-free pensions lump sum. Can I do this?

I have taken my pension from work, the Pearson Group, but I am continuing to work for a few more years. I am 67.
I’d like to go back into the pension scheme to get the benefits of them contributing and the tax-free bit on my contribution but the rules won’t let me.

I wondered if it was worth setting up a private pension because I heard that if you had a small pot you could take the lot without buying an annuity.
If so, it would be like saving but without paying tax on the income. Is this true and would you recommend it? GB, Sussex.

The short answer is that it is probably not worthwhile. But the the rules do state that you can have two small pension pots - where you don't have to buy and annuity - even after cashing in other larger pensions.

Andy Zanelli and technical pension expert at AXA Wealth explains:

There has been an ability to take ‘small pots’ as cash for many years and this was extended to private pensions in April 2012.

Technically the rules are

• You must have reached the age of 60

• The payment does not exceed £2,000

• It extinguishes all your rights under the arrangement, and

• You have not previously
received more than one payment under one of these types of schemes. This
excludes any separate ‘stranded payments’ commutation under an
occupational or public sector scheme.

Extra pension pot: If eligible, you could have two pots totalling around £4,000

If eligible, you could contribute to a pension scheme and get the
appropriate tax relief, therefore you could have two pots totalling
around £4,000.

Two key things to consider are,
firstly, ensuring the provider you deal with will make these types of
authorised payments. More importantly you are correct in that you
do not have to purchase an annuity and the payment is made in cash.

However it is paid as 25 per cent lump sum with the balance of the cash
being subject to tax at the clients marginal rate.

If you did the two pots and the full £4,000, £1,000 would be paid as tax-free cash and the balance, £3,000, would be added to the clients income and taxed appropriately.

More...

If you are in receipt of a
State Pension and benefits from the Pearson Group scheme this may well
take up all of your available Personal Allowance (the initial £10,500 you can earn tax-free) and make the balance
subject to at least 20 per cent tax.

If this is the case there may well be only a very marginal benefit balanced against some potential difficulties.

The ultimate benefits would depend on two variables:

The rate of tax relief the client got when paying the contribution – 20%, 40% or 50%

Tax on The rate of tax suffered on the balance payment as income – 0% [up to £10,500], 20%, 40% or 50%

In most cases I think the client would be getting 20% or 40% tax relief on the contribution – then 0% or more realistically 20% on the encashments.

In other words, the only situation when this might make sense would be if someone was paying 50% tax (on earnings above £150,000) and then was able to take the money out of the pension in a year when they were earning less than £10,500 - the tax-free threshold. It's highly unlikely anyone would be in that situation. If they were, they could save themselves £2,000 in income tax.

In any case, most pension companies would not consider doing this sort of business as it is not profitable for them.